SCOREBOARD: Risk revival

Risk appetite stirred on solid US data and European bond auctions, but EU markets were the biggest winners.

Solid US employment data and decent demand at French and Spanish bond auctions have seen US Treasuries sell off overnight (partially reversing as I write), in one of the biggest downside moves so far this year. Equities were bid while action elsewhere was a little more mixed. So the Treasury curve steepened as the US 10-year yield rose about 8bps (1.97 per cent at the time of writing), while the 2-year was 1bp higher (0.23 per cent). The 5-year was up just under 6bps (0.85 per cent), all of which saw Aussie futures offered – the 3s and the 10s down roughly 5-6 ticks to 96.78 and 96.15 respectively.

Spain managed to sell €6.6 billion of 2016, 2019 and 2022 bonds, which was well above the target of €4.5 billion and with bid to cover ranging from 2-3.2. In each case yields were sharply lower – so for instance the 2022’s went out at an average yield of 5.403 per cent, which is down from 6.975 per cent paid in November – although they then rose in the secondary market. So far, Spain has completed one-fifth of its 2012 funding needs. The French in turn sold €8 billion in bonds (maturities ranging from 2014, 2015 and 2016) with solid demand and lower yields than before their credit downgrade. Both auctions are a good sign that the European situation may be stabilising. This is why euro was up about 90 pips to 1.2938.

As to the data, we saw a big drop of about 50,000 in US jobless claims in the week to January 14 – to 352,000, which is the lowest number of new claims in nearly four years. Now admittedly there are seasonal adjustment problems this time of year, and the drop comes after a spike in claims the previous week. Still, taking the two together we have claims at about 377,000, which is down almost 20,000 from the fourth quarter. Continuing claims fell over 200,000 to sit at 3,430,000, which is the lowest in three-and-a-half years.

All of this conspired to see equities bid, especially in Europe where the Dax rose 0.97 per cent, the CAC was up 1.96 per cent and the FTSE was 0.7 per cent higher. Across the sea on Wall Street, the S&P500 only managed to put on 0.49 per cent by the closing bell, which was around the high. The index was 6.46 points higher (1314.5), led by industrials, consumer services and financials. The Dow for its part was up 45.03 points (12623.98), the Nasdaq ended 0.67 per cent higher (2788.33), while the SPI is 0.5 per cent higher (4218).

Price moves otherwise were reasonably nondescript with the Australian dollar up about 20 pips or so from 1630 to 1.0406 (34 at the high), while sterling was up 40 pips to 1.5472. Yen sits at 77.16 from 76.76. In the commodities space gold was then off smalls ($1651), ditto silver, although copper put on another 1.3 per cent. WTI was then down 0.4 per cent ($100.2), while Brent rose 0.7 per cent ($111.4).

Other data out last night showed US CPI unchanged in December, although the annual rate dipped to 3 per cent from 3.4 per cent. Core inflation rose 0.1 per cent to be 2.2 per cent higher annually which is unchanged from November. Housing starts were then down 4 per cent in December after a 9 per cent increase in November, while the Philly Fed index rose to 7.3 from 6.8 (average 5.3).

There isn’t much out today for Australia – trade prices is it at 1130 AEDT, and while this is a useful indicator in determining import price pressure, it isn’t market moving and doesn’t have a great relationship with CPI. Tonight, watch out for German producer prices, UK retail sales, Canadian CPI and existing US home sales (all December data).

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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